Problems: Set B. Problems: Set B 1

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1 Problems: Set B 1 Problems: Set B P7-1B The Soccer Club decided to sell coupon books as a fund-raising activity. The books allow users to enjoy restaurants, entertainment, and services such as oil changes, at substantial discounts. The club bought 100 books for $16 each, and members will sell them for $20. About 20 members attended the last club meeting, and most took one or two books to sell. Since the club had already paid for the books and didn t have other immediate cash needs, members do not have to pay for the books until they sell them. Extra books are stored on a book shelf in the club s on-campus office. The office is in a great location with plenty of student traffic. It is shared with the Marketing and Information Systems clubs. Each club has four sets of keys that are used by its officers and members. As students sell books, they bring the cash or checks to the club s office. Students with unusual class schedules who arrive when the office is locked can put payments under the door. Payments are stored in a desk drawer until the treasurer has time to make a bank deposit. Students can pick up more books to sell as needed. (a) Indicate the weaknesses in internal accounting control in the club s fund-raising plan. (b) Indicate improvements in internal control procedures for the club s fund-raising plan. P7-2B Tom Hall has worked for Dr. Johnson for several years. Tom demonstrates a loyalty that is rare among employees. He is always willing to cover for other employees and hasn t taken a vacation in three years. One of Tom s primary duties at the dental office is to open the mail, list checks received, and prepare the bank deposit form. He also collects cash from patients at the cashier window as patients leave. At times, it is so hectic that Tom doesn t bother to give patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. He is so well known by most patients that no one has ever complained. When traffic is slow in the office, Tom offers to help another employee, Sue, post the payments to patients accounts receivable. Dr. Johnson installed a computerized accounting program that requires a user ID and password to log in, but Tom and Sue have found that it is more efficient to just leave the computer on and the receivables file open all the time, and minimize the file when it is not in use. Identify internal control weaknesses for cash receipts. (LO 2, 3), C Identify internal control weaknesses in cash receipts and cash disbursements. (LO 2, 3, 4), C Identify the principles of internal control that may be violated in this situation. P7-3B On March 31, 2014, Taggert Company had a cash balance per books of $5, The statement from Western Bank on that date showed a balance of $6, A comparison of the bank statement with the cash account revealed the following facts. 1. The bank service charge for March was $ The bank collected a note receivable of $2,000 for Taggert Company on March 15, plus $115 of interest. The bank made a $20 charge for the collection. Taggert has not accrued any interest on the note. 3. The March 31 receipts of $1, were not included in the bank deposits for March. These receipts were deposited by the company in a night deposit vault on March Company check No issued to T. Gilroy, a creditor, for $672 that cleared the bank in March was incorrectly entered in the cash payments journal on March 8 for $ Checks outstanding on March 31 totaled $1, On March 31 the bank statement showed an NSF charge of $1, for a check received by the company from R. Fross, a customer, on account. (a) Prepare the bank reconciliation as of March 31. (b) Prepare the necessary adjusting entries at March 31. and adjusting entries. (a) Adjusted cash bal. $6,163

2 2 chapter 7 Fraud, Internal Control, and Cash and adjusting entries from detailed data. P7-4B The bank portion of the bank reconciliation for Triad Imports, Inc. at July 31, 2014, is shown below. TRIAD IMPORTS, INC. Bank Reconciliation July 31, 2014 Cash balance per bank $ 9,596 Add: Deposits in transit 930 $10,526 Less: Outstanding checks Check Number Check Amount 3151 $ , , ,172 4,812 Adjusted cash balance per bank $ 5,714 The adjusted cash balance per bank agreed with the cash balance per books at July 31. The August bank statement showed the following checks and deposits. Bank Statement Checks Deposits Date Number Amount Date Amount $ $ , , , , , , , , , , , Total $11,208 Total $8,841 The cash records per books for August showed the following. Cash Payments Journal Date Number Amount Date Number Amount $ $ , , , $1,508 Total $10,924 Cash Receipts Journal Date Amount 8-3 $ 1, , , , , , , , Total $10,668

3 Problems: Set B 3 The bank statement contained two bank memoranda: 1. A credit of $1,670 for the collection of a $1,600 note for Triad Imports plus interest of $80 and less a collection fee of $10. Triad Imports has not accrued any interest on the note. 2. A debit for the printing of additional company checks $70. At August 31, the cash balance per books was $5,478, and the cash balance per bank statement was $13,563. The bank did not make any errors, but Triad Imports, Inc. made two errors. (a) Using the four steps in the reconciliation procedure described in the textbook, prepare a bank reconciliation at August 31, (b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.) P7-5B Bug Busters Company performs insect extermination services. On October 31, 2014, the company s cash account per its general ledger showed a balance of $4,632. The bank statement from Central Bank on that date showed the following balance. CENTRAL BANK Checks and Debits Deposits and Credits Daily Balance XXX XXX ,070 A comparison of the details on the bank statement with the details in the cash account revealed the following facts. 1. The statement included a debit memo of $50 for the printing of additional company checks. 2. Cash sales of $342 on October 6 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $372. The bank credited Bug Busters Company for the correct amount. 3. Outstanding checks at October 31 totaled $1,250, and deposits in transit were $2, On October 13, the company issued check No for $196 to T. Grey, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Bug Busters Company for $ A $1,000 note receivable was collected by the bank for Bug Busters Company on October 31 plus $50 interest. The bank charged a collection fee of $15. No interest has been accrued on the note. 6. Included with the canceled checks was a check issued by Fig Leaf Company for $120 that was incorrectly charged to Bug Busters Company by the bank. 7. On October 31, the bank statement showed an NSF charge of $230 for a check issued by Jon Simpson, a customer, to Bug Busters Company on account. (a) Prepare the bank reconciliation at October 31, (b) Prepare the necessary adjusting entries for Bug Busters Company at October 31, P7-6B You are provided with the following information taken from Items Inc. s May 31, 2014, balance sheet. Cash $ 19,000 Accounts receivable 47,600 Inventory 21,000 Property, plant, and equipment, net of depreciation 70,400 Accounts payable 18,200 Common stock 110,000 Retained earnings 21,800 Additional information concerning Items Inc. is as follows. 1. Gross profit is 40% of sales. 2. Actual and budgeted sales data: May (actual) $68,000 June (budgeted) 60,000 (a) Adjusted cash bal. $7,141 and adjusting entries. (a) Adjusted cash bal. $5,330 Prepare a cash budget. (LO 8), AP

4 4 chapter 7 Fraud, Internal Control, and Cash 3. Sales are both cash and credit. Cash collections expected in June are: May $47,600 (70% of $68,000) June 18,000 (30% of $60,000) $65, Half of a month s purchases are paid for in the month of purchase and half in the following month. Cash disbursements expected in June are: Purchases May $18,200 Purchases June 27,500 $45, Cash operating costs are anticipated to be $21,300 for the month of June. 6. Equipment costing $6,000 will be purchased for cash in June. 7. The company wishes to maintain a minimum cash balance of $11,000. An open line of credit is available at the bank. All borrowing is done at the beginning of the month, and all repayments are made at the end of the month. The interest rate is 9% per year, and interest expense is accrued at the end of the month and paid in the following month. Prepare a cash budget. (LO 8), AP Jan. 31 adjusted cash bal. $40,000 Prepare a comprehensive bank reconciliation with theft and internal control deficiencies. (LO 2, 3, 4, 5), E Prepare a cash budget for the month of June. Determine how much cash Items Inc. must borrow, or can repay, in June. P7-7B Noble Corporation prepares monthly cash budgets. Relevant data from operating budgets for 2014 follow. January February Sales $260,000 $318,000 Purchases 112, ,000 Salaries 72,000 78,000 Administrative expenses 58,000 60,000 Selling expenses 30,000 36,000 All sales and purchases are on account. Budgeted collections and disbursement data are given below. All other expenses are paid in the month incurred except for administrative expenses, which include $2,000 of depreciation per month. Other data: 1. Collections from customers: January $279,500; February $298, Payment for purchases: January $106,000; February $116, Other receipts January: collection of December 31, 2013, interest receivable $7,500; February: proceeds from sale of securities $8, Other disbursements January: pay $35,000 note payable due January 1, 2014; February: pay $5,000 cash dividend 5. The company s cash balance on January 1, 2014 is expected to be $52,000. The company wants to maintain a minimum cash balance of $40,000. Prepare a cash budget for January and February. P7-8B Elite Service Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, Steve Evans handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations. The balance per the bank statement on March 31, 2014, was $5, Outstanding checks were: No. 206 for $358.53, No. 441 for $292, No. 590 for $283.00, No. 781 for $286.00, No. 782 for $319.47, and No. 783 for $ Included with the statement was a credit memorandum of $175 indicating the collection of a note receivable for Elite Service Company by the bank on March 21. This memorandum has not been recorded by Elite Service. The company s ledger showed one cash account with a balance of $6, The balance included undeposited cash on hand. Because of the lack of internal controls, Steve took for personal use all of the undeposited receipts in excess of $1, He then prepared the following bank reconciliation in an effort to conceal his theft of cash.

5 Problems: Set B 5 Cash balance per books, March 31 $6, Add: Outstanding checks No. 781 $ No No , Less: Undeposited receipts 1, Unadjusted balance per bank, March 31 6, Less: Bank credit memorandum Cash balance per bank statement, March 31 $5, (a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.) (b) Indicate the three ways that Steve attempted to conceal the theft and the dollar amount involved in each method. (c) What principles of internal control were violated in this case? (a) Adjusted cash bal. $5,681.00